Deck 26: Liability for Negotiable Instruments

Question 1

The accidental destruction of a negotiable instrument will not result in its cancellation.

Answer 1

True

Question 2

An indorser who writes "without recourse" next to her signature on a negotiable instrument is not liable for payment.

Answer 2

True

Question 3

Negotiable instruments are normally issued to fulfill a contract.

Answer 3

True

Question 4

Lance indorses a promissory note to Connie in exchange for consideration. Unknown to Lance, the note is not good because the maker's signature was forged. Connie later attempts to present the instrument for payment to the original alleged maker, Lilly, who is able to deny liability for payment due to the forged signature. Connie may later sue Lance for breach of a transfer warranty.

Question 5

Under the UCC, all of the following have the right to enforce payment of an instrument EXCEPT

A) a holder of the instrument.
B) anyone to whom the shelter rule applies.
C) a holder who has lost the instrument.
D) a holder who intentionally destroys the instrument..

Question 6

Warranty liability is the liability of someone who gives payment on a negotiable instrument.

Question 7

Nelson writes Leah a check for mowing his lawn. Leah deposits the check in her bank, but it is not paid by Nelson's bank. Leah calls Nelson to notify him that her bank returned his check to her unpaid. Leah's notice of the dishonor is insufficient; she must provide written notice.

Question 8

If an employee with responsibility for issuing instruments forges a check or other instrument, then any indorsement in the name of the payee, or a similar name, is valid as long as the person who pays the instrument doesn't know of the fraud.

A) the Imposter Rule
B) the Conversion Rule
C) the Employee Indorsement Rule
D) the Fictitious Payee Rule

Question 9

Maurina Barker is an agent of Southland, and she is authorized to sign checks on Southland's bank account. If Maurina signs a check as "Maurina Barker, as agent for Southland" she is not liable on the instrument.

Question 10

Conversion means that someone has stolen an instrument or a bank has paid a check that has a forged indorsement.

Question 11

When signing a company check, an agent must clearly indicate that he or she is signing on behalf of the company in order to be free of liability.

Question 12

An accommodation party and a co-maker of a note have the same liability on an instrument.

Question 13

Assume that Joel signs a promissory note to Andrew, who in turn negotiates the instrument to Luke. Of the three, Joel is the only person who has primary liability.

Question 14

Which of the following is NOT one of the five ways to discharge a negotiable instrument?

A) payment
B) cancellation
C) alteration
D) presentation

Question 15

Drawers and indorsers are secondarily liable on negotiable instruments.

Question 16

Sandy may be charged a fee, but will not face criminal penalties for writing checks on an account with insufficient funds to pay them.

Question 17

A drawee has primary liability on a draft.

Question 18

Paula is a sales agent for The Rock Insurance Company. Paula accepts a check from a customer made payable to her in payment for the premium on an insurance policy. Prior to depositing the check in The Rock's bank account, Paula indorses the check as follows: "The Rock Insurance Company, by Paula Beck, agent." Assuming that Paula has authority to indorse company checks, if the check is dishonored, then between Paula, The Rock, and the bank

A) Paula only will be liable.
B) Paula and The Rock will be liable.
C) The Rock only will be liable.
D) The bank will be stuck with the dishonored check.

Question 19

Verne has possession of a draft that has been validly negotiated to him. His payment process necessarily includes

A) presentment of the draft, dishonor, and notice of dishonor.
B) exhibiting the instrument, showing reasonable identification, and surrendering the draft if it is paid in full.
C) exhibiting the draft, providing a thumbprint signature, and giving a receipt.
D) suspending the underlying debt, applying the shelter rule, and making a demand for payment.

Question 20

Suppose that Emmett impersonates a famous clown. He goes into an advertising agency and convinces the manager to issue a check to him in the name of the famous clown, purportedly as part of a fund-raising campaign for a nursing home for old retired clowns. If Emmett negotiates the check to a check-cashing store by forging the name of the famous clown, then the ad agency will be able to argue that the bank must reimburse the account because the bank paid a check on a forged signature.

Question 21

Tom indorsed a check made payable to the order of Tom Jones as follows: Pay Raymond Berry
/s/ Tom Jones
Raymond negotiated the check to his landlord for his rent. Raymond indorsed the check as follows:
Without Recourse
/s/ Raymond Berry
With regard to Tom's indorsement, which statement is correct?

A) Tom has secondary contractual liability on the check as an indorser.
B) Tom has no contractual liability on the check because he is the payee.
C) Tom has primary contractual liability on the check as payee.
D) Tom eliminated his liability as an indorser by the type of indorsement he used.

Question 22

Anyone who presents a check for payment makes certain warranties. Which of the following is NOT one of those warranties?

A) that he or she is a holder
B) that the check has not been altered
C) that the drawee is a solvent institution
D) that all signatures are authentic

Question 23

Which of the following parties has primary liability on a draft?

A) the drawee
B) the maker
C) the drawer
D) the indorser

Question 24

An accommodation party on a negotiable instrument

A) typically receives a direct benefit from the instrument.
B) is always primarily liable for the instrument.
C) is the same as a "guarantor" under the UCC.
D) has the same liability to a holder as the person for whom he signed.

Question 25

Alejandro signs on the back of an instrument; he is considered to be

A) an indorser.
B) an acceptor.
C) an issuer.
D) None of these are correct.

Question 26

Which of the following statements regarding instrument liability is TRUE?

A) The holder of an instrument must first ask for payment from those who are secondarily liable.
B) For any given instrument, only one person can be liable at a time.
C) A person with primary liability is unconditionally liable and must pay unless he or she has a valid defense.
D) A person with secondary liability has the same liability to the holder as a person with primary liability.

Question 27

Cecilia made a check out to Gideon for $15. Gideon fraudulently changed the check to read $150, and cashed it at Corner Bank. Is Cecilia discharged from liability on the check?

A) Yes, Cecilia owes nothing on the check because alteration of a check is a real defense and real defenses are good even against holders in due course.
B) No, Cecilia pays $150 because of the impostor rule.
C) No, Cecilia pays $150 because she is not an indorser or accommodation party.
D) Yes, Cecilia owes nothing unless Corner Bank is a holder in due course, in which case she owes the original $15.

Question 28

Discharge means that

A) someone has stolen an instrument.
B) an obligor refuses to pay an instrument that is due.
C) liability on an instrument terminates.
D) a bank has paid a check that has a forged indorsement.

Question 29

Jessie is the maker of a $1,000 promissory note in favor of Tyler. Tyler subsequently indorses the note to Ryan by signing just his name. Ryan in turn indorses it to Breanna by indorsing the back of the note, "Without recourse, Ryan." Breanna then indorses it to Liz, the present holder, with a special indorsement. If the note is dishonored by Jessie after it is properly presented to her for payment by Liz, then Liz, after giving timely notice to Tyler, Ryan, and Breanna, may collect payment under signature liability from

A) Tyler only.
B) Breanna and Tyler only.
C) either Tyler, Ryan, or Breanna.
D) neither Tyler, Ryan, nor Breanna.

Question 30

Ivy wants to buy a necklace from Bethany for $500 and offers to write a check. To protect herself, Bethany insists that Ivy give her a certified check. If Ivy does this, who then becomes primarily liable?

A) Bethany
B) the bank
C) Ivy
D) both Ivy and the bank

Question 31

What term is used to indicate the passing on of an instrument that one knows to be forged?

A) discharge
B) utter
C) kite
D) bounce

Question 32

When a negotiable instrument is transferred, the transferor warrants all of the following EXCEPT

A) the instrument is bearer paper.
B) all signatures are authentic.
C) as far as she knows the issuer is solvent.
D) the instrument has not been altered.

Question 33

Lana wrote a check knowing that she did not have sufficient funds in her account. What is this practice called?

A) check kiting
B) bouncing a check
C) check forgery
D) check covering

Question 34

A check was indorsed as follows: Jessica Hall
Without recourse
Paul Samuels
Collection guaranteed
Melissa Liston
Which of the following will discharge all of the indorsers?

A) notice of dishonor after 30 days' time
B) the "without recourse" indorsement within the chain
C) insolvency of drawer
D) certification of the check

Question 35

An instrument ordering someone else to pay money is called a(n)

A) accommodation.
B) transfer warranty.
C) discharge.
D) draft.

Question 36

Check kiting is defined as

A) indorsing a check while knowing that the check is a stolen check.
B) carelessly paying an unauthorized instrument.
C) a scheme of overdrawing account "A" by depositing a check in account "B," then overdrawing account "B" to cover the insufficient funds in account "A."
D) issuing an instrument to an impostor who negotiates the instrument to a bank that is unaware of the fraud.

Question 37

Which of the following will discharge an instrument?

A) John asks Bev, an employee, to take money to the bank to pay off a note, but she keeps the money instead.
B) Two people make an oral agreement to discharge.
C) Chet accidentally leaves a check in his pocket and it is destroyed in the washing machine.
D) The terms of the instrument are intentionally changed.

Question 38

When a person indorses a check, the indorser assumes contractual liability based on the indorsement. This liability expires unless presentment is made

A) within 3 days of indorsement.
B) within 7 days of indorsement.
C) within 30 days of indorsement.
D) within a reasonable time after the indorsement.

Question 39

Mack writes a check to his maid, Marianne, in payment for services rendered. Marianne indorses the check in blank and gives the check to her masseuse, Janet, in exchange for a neck massage. Without indorsing the check, Janet gives the check to Martin, her newspaper carrier, in payment for the next four months' delivery charges. Martin indorses with a special indorsement and negotiates the check to his church, St. Mark. The church indorses the check and deposits it in its bank account. If Mack's bank later dishonors the check, to whom may St. Mark's look for recovery?

A) Martin only
B) Mack only
C) Mack, Marianne, Janet, and Martin
D) Mack, Marianne, and Martin

Question 40

Generally, indorsers are not liable under signature liability if

A) they write the words "without recourse" next to their signatures on the instrument.
B) they are not the drawee.
C) a check is presented for payment within 30 days after the indorsement.
D) they are an accommodation party.

Question 41

James Packard, a lawyer representing Robert Marino, received a check for $16,000 in settlement of Robert's case. Instead of turning over the money to Robert or putting it into a trust fund for him, James forged Robert's indorsement and deposited the money into his own account without notifying Robert. Discuss the claims the parties have.

Question 42

List the warranties a transferor of a negotiable instrument makes.

Question 43

List and explain the five different ways to discharge an instrument according to Article 3 of the UCC.

Question 44

Dwight Stringer signed three promissory notes as an agent for his company. The first, he signed "Dwight Stringer, agent for Park Systems, Inc." The second, he signed "Dwight Stringer, Agent." The third note was signed merely "Park Systems, Inc." Discuss the liability of Dwight and Park Systems, Inc. on each of the notes.

Question 45

Explain when presentment warranties apply. Identify the presentment warranties on a check and a promissory note.